The One Stock You Must Buy

Stop me if you've heard this one. The one stock you must buy is ... the next Microsoft (Nasdaq: MSFT), the next Wal-Mart (NYSE: WMT), the next Adobe (Nasdaq: ADBE), and the next Dell (Nasdaq: DELL) all rolled into one.

I'm sure you've heard some semblance of that pitch at cocktail parties, golf outings, weddings, and of course, on the Internet.

It's a pretty appealing pitch. After all, Microsoft, Wal-Mart, Adobe, and Dell are some of the stock market's greatest success stories. These companies have earned early investors simply mind-boggling returns over their lifetimes.

The secrets of success
So the question is: Does that one stock you must buy exist? Of course it does. But can you find it? That's a different matter.

Here, however, is a litmus test to gauge every stock tip you come across. Simply ask: Does this company bear any resemblance at all to Microsoft, Wal-Mart, Adobe, and Dell before they were big names?

That's not to say that one stock will be a discount retailer or a tech superstar. Rather, Microsoft, Wal-Mart, Adobe, and Dell all share a set of remarkable traits that characterized them when their remarkable stock market runs began. All were:

1. Small.
2. Led by a dedicated founder.
3. Fiscally conservative.
4. Profiting from a wide market opportunity.

If the next stock that's pitched to you doesn't possess these traits, then you're probably better off passing.

A case study
Consider, for example, the case of Sirius XM Radio (Nasdaq: SIRI) -- the stock that is most often pitched to me at cocktail parties, golf outings, weddings, and of course, on the Internet.

It it small? It is today since its stock has been crushed, but just six months ago Sirius was capitalized at $4.5 billion.

Is it led by a dedicated founder? No. Though Mel Karmazin has entertainment industry experience, he only came aboard in 2004.

Is it fiscally conservative? No. The company is not profitable, carries a heavy debt burden, and continues to dilute shareholders.

Does it have a wide market opportunity? Folks may disagree with me here, but I think the markets for music and news are already fractious and saturated.

The Foolish final word
I'm not here to be negative about Sirius. The company could right its ship and reward investors. However, I don't think that it possesses the core traits that made companies like Microsoft, Wal-Mart, Adobe, and Dell such incredible investments -- the qualities we seek in the Motley Fool Hidden Gems small-cap investing service.

Again, we believe that tomorrow's big winners will start off:

1. Small.
2. Led by a dedicated founder.
3. Fiscally conservative.
4. Profiting from a wide market opportunity.

If you'd like to take a look at the companies we've found that meet the four criteria mentioned above, click here to join Hidden Gems free for 30 days.

This article was first published on Oct. 19, 2006. It has been updated.

Tim Hanson does not own shares of any company mentioned. Microsoft, Dell, and Wal-Mart are Inside Value recommendations. The Fool's disclosure policy assures you that no stocks were harmed in the penning of this article.